China says cooling inflation still top priority

By JOE McDONALD | September 11, 2011 | 11:55 PM EDT

BEIJING (AP) — China's central bank said Monday that cooling surging prices still is its top priority even after inflation eased slightly in August.

The announcement might disappoint companies and investors who hope Beijing will respond to a slowing global economy by reversing repeated interest rate hikes and other curbs imposed in an effort to cool China's overheated economy.

Beijing is trying steer growth that hit 9.5 percent in the latest quarter to a more sustainable level even as Washington and other Western governments struggle to shore up tepid growth and prevent a renewed global recession.

China's inflation spiked to a 37-month high of 6.5 percent in July before retreating to 6.2 percent in August, still among the highest levels of the past three years.

"Our country has controlled several of the factors causing prices to rise, but the fundamentals have not been eliminated, and a stable price level still is the primary mission of macro-controls," the central bank statement said.

Inflation is politically dangerous for China's communist leaders because it erodes economic gains that help to underpin the ruling party's monopoly on power.

Analysts blame the price spike on strong demand for food and a bank lending boom that was part of Beijing's response to the 2008 global financial crisis. Summer floods this year have damaged crops, reducing supplies of vegetables and grain.

Repeated rate hikes and investment curbs have prompted a shortage of credit for China's small and privately owned companies, which produce all of the country's new jobs.

The August price rises were driven by a 13.4 percent jump in politically sensitive food prices. That was down from July's 14.8 percent, but still uncomfortably high for a society where the poorest families spend half their incomes on food.

Non-food inflation, which has remained low until now, also rose in August to 3 percent, driven by a 14.9 percent jump in fuel costs.